Jefferies says investors must use income strategies, like buying these high-quality dividend stocks

Published Thu, Sep 22 202212:31 PM EDT

Jefferies thinks investors need to look for income in this volatile market environment, noting that one of the best ways to do that is through high-quality dividend stocks. The stock market tumbled Wednesday, and Treasury yields soared, after the Federal Reserve hiked interest rates by 75 basis points for the third time in a row. The central bank also indicated there are more rate increases to come in order to rein in inflation. At the same time, there are concerns about a possible recession on the horizon. "Our analysis of the various conflicting macro indicators suggests a soft landing is in progress, with a recession likely next year. Given the economic uncertainty, yield plays should continue to benefit with high-quality yield being the main focus along with dividend growers," said Desh Peramunetilleke, global head of microstrategy at Jefferies. The firm has a number of dividend strategies, such as bond proxies, which are high-yield stocks that have low growth similar to bond coupons and are in sectors that have predictable cash flows. Other strategies include dividend growers and growth at a reasonable yield. Most recently, Jefferies began strategizing on high-quality yield plays, which focus on above-median yielders that have a high quality score based on its quality framework. Jefferies data show that high-quality yield stocks have outperformed in downturn and slowdown phases. "Focusing on high-quality yield stocks has been highly rewarded over the long term," Peramunetilleke wrote in a note Thursday. With that in mind, the firm put together a list of high quality U.S. stocks it thinks can do well going forward. The companies are in the top two quintile of high-quality global companies, with a quality score of 4/5 or 5/5 and a market cap of more than $5 billion. They all have 12-month forward dividend yields above the median and are also expected to be highly profitable in terms of return on equity (ROE). They've also had a recent history of strong return on investment capital. The name on the list with the highest 12-month forward dividend yield is Enterprise Products Partners , which provides midstream energy services to North American oil and gas producers. The stock, up more than 16% so far this year, has a 12-month forward dividend yield north of 7%. Merck and Broadcom both have 3.4% 12-month forward dividend yields. Broadcom shares have slid 28% this year. Earlier this month, the chip maker reported quarterly earnings and revenue that beat analyst forecasts. The company also issued a stronger-than-expected revenue forecast for the current quarter. Merck, on the other hand, is up more than 12% year to date. The global health-care company was recently upgraded by Berenberg to buy from hold. "For investors seeking a low-risk value option in the pharma sector, we believe Merck & Co offers many attractions: medium-term growth just ahead of the sector average, limited patent expiry burden, low exposure to US price reform, margin expansion and no litigation overhang," analyst Luisa Hector wrote in a note last week. Another pharma giant on the list is Johnson & Johnson . The company, which is down about 4% year to date, has a 12-month forward dividend yield of 2.8%. Coca-Cola 's 12-month forward dividend comes in slightly higher at 2.9%. The beverage company, which is up just 0.35% this year, reported in July second-quarter earnings per share and revenue that beat expectations. Atlantic Equities recently reiterated its overweight rating on the stock, saying Coca-Cola seems immune to spiraling cost pressures. Coca-Cola was also named a top dividend stock by Morgan Stanley, while CNBC's Jim Cramer said it was one of his 10 favorite " dividend aristocrats ." — CNBC's Michael Bloom contributed reporting.